Grading Bernanke on Communication

In his Capital column earlier this week, David Wessel offered four tests for grading Ben Bernanke’s success in clarifying the Federal Reserve’s intentions on the bond-buying situation. Stock and bond markets fell during and after his comments, but how did he do on clarity?

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Federal Reserve Chairman Ben Bernanke

WESSEL: Does he provide any clarity on what economic data will lead the Fed to gently reduce its monthly bond buying, or do disagreements inside the Fed and a cloudy growth forecast make that impossible?

Grade: A

Mr. Bernanke cited Fed officials’ new forecasts said that if the economy and job market continue to improve, and inflation moves closer to the central bank’s 2% target, as it expects, then the Fed is on pace to begin to wind-down bond purchases later this year and end them next year when it anticipates unemployment will be at 7%. Two of the 12 voting members of the Fed’s policy committee dissented, one for moving more quickly to reduce the bond-buying and one for moving more slowly. But that didn’t prevent Mr. Bernanke from conveying where the majority of the committee is moving.

WESSEL: While giving himself some wiggle room, does he indicate that if the economy, the job market and inflation do as updated Fed forecasts anticipate, then does — or doesn’t — the Fed expect to scale back bond buying before year-end?

Grade: A

Yes, he said explicitly that if there are no surprises, the Fed will begin to reduce its bond purchases before year-end. He left himself some wiggle room, though. If unemployment doesn’t fall as the Fed anticipates or if inflation doesn’t climb closer to the Fed’s 2% target, then it may alter its plans.

WESSEL: Is he convincing when he says that a Fed move to reduce the size of its bond buying is not a harbinger of an increase in short-term interest rates before unemployment hits 6.5%?

Grade: A

Yes. Mr. Bernanke emphasized that an end to bond-buying is an end to bond-buying, not a sign that the Fed is itching to raise short-term interest rates, which have been near zero since late 2008. The Fed still expects to keep short-term rates low at least until unemployment falls to 6.5%, but he stressed that it might keep them low beyond that. “It’s a threshold, not a trigger,” he said.

Of the 19 Fed governors and regional Fed bank presidents who participate in deliberations –12 of whom have votes at any one time — 10 expect the first increase in the federal funds rate to come in 2015 even though the bulk of them expect unemployment to be between 6.5% and 6.8% at year-end 2014.

WESSEL: Does he reveal how much the Fed’s thinking has been influenced by the recent decline in inflation, now well below the Fed’s 2% target?

Grade: B

The pace of inflation is will be an important factor in Fed decision making. “The more subdued the outlook for inflation … the more patient the committee would be” in tightening policy, he said. The Fed will work on “not only avoiding inflation that’s too high but we also want to avoid inflation that’s too low,” he added.

He suggested that some of the recent decline in inflation reflects statistical flukes and temporary factors and noted that the market’s expectations for inflation have come down, but “still remain within the historical range we’ve seen.” But, despite reporters’ questions, he didn’t explain why the Fed seems poised to curb its bond buying with inflation so far below its 2% target.

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